Marathon Oil (MRO) Lee M. Tillman on Q4 2015 Results - Earnings Call Transcript

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Marathon Oil Corp. (NYSE:MRO)

Q4 2015 Earnings Call

February 18, 2016 9:00 am ET

Executives

Christopher C. Phillips - Director-Investor Relations

Lee M. Tillman - President, Chief Executive Officer & Director

Lance W. Robertson - Vice President-North America Production Operations

Thomas Mitchell Little - Vice President—International and Offshore Exploration and Production Operations

John R. Sult - Executive Vice President and Chief Financial Officer

Analysts

Doug Leggate - Bank of America Merrill Lynch

Edward George Westlake - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Evan Calio - Morgan Stanley & Co. LLC

Brian Singer - Goldman Sachs & Co.

Harry Mateer - Barclays Capital, Inc.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

Roger D. Read - Wells Fargo Securities LLC

John P. Herrlin - SG Americas Securities LLC

Pavel S. Molchanov - Raymond James & Associates, Inc.

Paul Sankey - Wolfe Research LLC

Arun Jayaram - JPMorgan Securities LLC

Unknown Speaker

-MANAGEMENT DISCUSSION SECTION

Operator

Welcome to the Marathon Oil Corporation 2015 fourth quarter earnings conference call. My name is Katie, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Chris Phillips. Mr. Philips, you may begin.

Christopher C. Phillips - Director-Investor Relations

Thank you, Katie. Good morning and welcome to Marathon Oil Corporation's fourth quarter and full 2015 earnings and full 2016 capital program conference call. I'm Chris Phillips, Director of Investor Relations. Also joining me on the call this morning are: Lee Tillman, President and CEO; J.R. Sult, Executive Vice President and CFO; and Mitch Little, Vice President Conventional; Lance Robertson, Vice President Resource Plays; and Zach Dailey, Director of Investor Relations.

As has become our custom, we released prepared remarks last night in connection with the earnings release. You can find those remarks and the associated slides on our website at MarathonOil.com. We will begin this morning with additional prepared remarks discussing our 2016 capital program. We issued a separate press release detailing our 2016 capital program last evening. We posted a second slide presentation earlier today that accompanies this morning's prepared remarks that can also be found on our website. After our remarks, the remainder of the call be available for Q&A. As a reminder, today's call is being recorded.

Slide two contains a discussion of forward-looking statements and other information included in this presentation. Our review will contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. We have identified in our latest Annual Report on Form 10-K and other filings with the Securities and Exchange Commission a number of important factors that could cause future outcomes to differ materially from those set forth in those forward-looking statements. Please refer to the quarterly investor packet on our website for reconciliations of the non-GAAP financial measures discussed in this presentation to their most recently comparable GAAP financial measures.

With that, I will turn the presentation over to Lee, who will begin on slide three.

Lee M. Tillman - President, Chief Executive Officer & Director

Thanks, Chris. I'd like to extend my welcome to those listening.

Last night we announced a reduced capital program for 2016 that reflects the current challenging environment and our clear objective of balance sheet protection. Our $1.4 billion program in 2016 is over 50% lower than last year's program and 75% lower than 2014. As the chart illustrates, we have responded as oil prices have fallen dramatically and are doing the same in 2016, with our capital program calibrated to a view of WTI in the upper $30s and assume success in our non-core asset sale program.

Our business planning and budgeting are not static, but rather decisions are being made in real time, in large part facilitated by the optionality afforded by our short-cycle investments. We have designed our 2016 program to maximize capital allocation to the short-cycle investments in our U.S. resource plays, complete long-cycle projects that contribute production, and minimize allocation to conventional exploration.

Guided by these principles as the foundation of our plan, production volumes were by design an outcome, not an objective, and we are forecasting a total company production decline of 6% to 8% year over year adjusted for divestitures. This program provides us the optionality to further adjust our short-cycle investments if needed based on commodity prices and the outcome of our non-core asset sales.

Last year, we achieved over $300 million of non-core asset sales toward our original goal of at least $500 million. When we set that original target, we were transparent that the non-core assets under consideration far exceeded $500 million. Based on the transactions announced to date as well as progress on the remaining assets, we've increased our target to a range of $750 million to $1 billion. This year's capital allocation is designed to position the company for a sustained period of low commodity prices while maintaining the capability to be flexible in a dynamic environment.

Slide four illustrates the allocation of our 2016 program in a bit more detail. As I mentioned, the majority of our 2016 program, about 70%, will be directed to the Eagle Ford, SCOOP/STACK, and Bakken. For each of our three core resource plays, we have set specific objectives for our 2016 investment, namely: maintaining the efficiencies our Eagle Ford team has worked so hard to capture; protecting our leasehold in the STACK while continuing to improve our understanding of the Oklahoma Resource Basins; and focusing on our base business in the Bakken with operated D&C greatly reduced; all of this, of course, while continuing to focus on sustainable cost reduction that will be maintained through the commodity cycle.

Across the remainder of the portfolio, we will be completing several long-cycle projects in 2016, most notably our operated Compression project in EG [Equatorial Guinea]. This project will extend plateau production from the Alba field by an additional two years and allow us to develop in excess of 130 million net oil equivalent barrels of proven reserves.

In addition to the EG Compression project, we expect first oil this year from investments in two outside operated projects, Gunflint in the Gulf of Mexico and Atrush in the Kurdistan region of Iraq.

We're forecasting about $40 million of sustaining CapEx toward our non-operated working interest in the Oil Sands this year. We, along with the operator and other JV partner, are intensely focused on building upon the structural cost improvements and better uptime reliability achieved in 2015.

Finally, we've significantly reduced our conventional exploration CapEx this year to $30 million, down about 90% from last year, following the strategic decision we made last fall to scale back in this space. This year's spend is largely limited to existing commitments in the Gulf of Mexico and Gabon, with no new exploration wells planned in 2016.

As we enter another year with reduced capital investment, we again look to our short-cycle U.S. resource plays to continue providing the operational flexibility to adapt to changing market conditions.

With that, I'll turn it over to Lance to review the resource plays in a bit more detail.

Lance W. Robertson - Vice President-North America Production Operations

Thanks, Lee. I'll continue with a broad overview of the 2016 program for U.S. resource plays on slide five.

Consistent with our focus on prioritizing the balance sheet this year, our allocation to the resource plays is anticipated at $1 billion, down about 50% from 2015. As Lee said, the short-cycle nature of these assets allows us to be flexible in a volatile commodity market. If needed, we have the option to reduce spending down further, with substantially all of our acreage held by production in the Bakken, the Eagle Ford, and in the SCOOP-Woodford. We also have relatively few leases with continuing drilling obligations and no long-term rig commitments in these plays.

The pie charts on the slide depict our operated drilling and completions, our non-operated drilling and completions, and other spend across each basin. Through the budget planning process, our intent was to maximize the allocation to drilling and completions opportunities. The non-operated drilling and completions component of the budget is our current best estimate of the spend based on recent engagement with partners. In the current commodity environment, we are closely scrutinizing each project proposal for costs and returns. When prudent, we will non-consent discretionary projects that do not deliver adequate returns. Given the continuing decline in industry rig counts across our three basins, the expected bias in the non-operated estimates is lower.

For reference, the other spend category broadly consists of diverse non-discretionary items for direct support of development activity, such as centralized facilities expansions, data gathering, and other items not directly included in drilling and completions costs, but essential parts of an operation.

Turning to the Eagle Ford, we are down to seven rigs, and we will be scaling down further to five rigs near the end of the first quarter. Additionally, we will be reducing to a single frac crew for much of the year that will match drilling activity. Consistent with our past practices, we plan to maintain sufficient inventory to keep the completion crew operationally efficient. This activity level retains our execution capability and core competencies, allowing us to continue co-developing the highest-value Austin Chalk upper and lower Eagle Ford horizons across our core acreage position. A continued focus on enhancing well productivity through stimulation design and technology application has recently yielded encouraging early results in our high-GOR [Gas/Oil Ratio] oil areas. As this activity matures, we anticipate sharing more details throughout the year.

In the Oklahoma Resource Basins, our capital spend will focus on retaining term leases in the core of the STACK-Meramec as we continue to delineate the rich condensate window and optimize stimulation designs. While maintaining leases will be our primary objective across Oklahoma this year, based on the success of our first operated Springer oil well in the fourth quarter in the SCOOP, we will also continue to progress limited Springer activity to delineate the downdip areal extent of this play.

In the Bakken, we will focus on the base business, where we will complete our ongoing water gathering system later this year to further reduce our largest single expense, water handling. Based on the current commodity price environment, we recently released our last operated rig in the Bakken and plan to have intermittent development activity later in the year, primarily to address continuing drilling obligations. With this reduced level of activity and at recent strip pricing, we anticipate Bakken achieves cash flow neutrality in 2016.

The $75 million earmarked for outside-operated activity in Bakken is our current best estimate of AFEs we expect to receive from partners this year, and each will be scrutinized closely given the current low commodity environment. Despite reduced resource play activity, we continue to balance our current actions with the need to be responsive when more constructive pricing occurs.

With that, I'll turn the call over to Mitch to review capital activities outside the resource plays.

Thomas Mitchell Little - Vice President—International and Offshore Exploration and Production Operations

Thank you, Lance. Referring to slide six, I'll provide a brief overview of 2016 activities across our remaining portfolio, where we continue to moderate capital spend while delivering profitable long-cycle projects during the year.

Starting with our OSM [Oil Sands Mining] segment, we've achieved a step-change reduction in sustaining capital levels, and our 2016 CapEx at about $40 million is well below historical averages. Along with the operator and other JV partner, our focus remains on maintaining the improved reliability while lowering operating and sustaining capital costs to reposition the business for profitable operation within the current environment.

Despite challenging pricing in the third and fourth quarters last year, OSM was cash flow positive, thanks to operating costs that averaged less than $30 per barrel of synthetic crude oil for the two consecutive quarters. With the more consistent operations, our three highest net production quarters in the history of the operation occurred last year, leading to 2015 annual production volumes net of royalty at an all-time high, while unplanned downtime was at an all-time low.

Outside of OSM, we expect to complete three long-cycle projects in 2016, bringing incremental cash flow starting in the second half of the year. Beginning with our operated business in EG, we completed a successful and incident-free installation campaign of the combined 10,000-ton jacket and topsides for the Alba B-3 Compression project in mid-January. The project remains on budget and on schedule. Following hookup and commissioning activities, we expect a midyear startup of the new facility. The installation will add 72,000 horsepower of compression and associated process equipment and utilities, which allow us to significantly extend Alba field life to beyond 2030 with minimal future capital requirements.

In the Gulf of Mexico, we expect startup of the outside-operated Gunflint two-well subsea development, also by midyear.

Finally, in the Kurdistan Region of Iraq, developments are progressing within the Atrush and Sarsang outside-operated blocks. In the Atrush block, installation of the Phase 1 30,000 barrel per day facility is progressing, with first oil expected later this year. Four existing wells will feed the facility, and future development decisions will be evaluated following the assessment of well and reservoir performance.

In late 2015, a second well and well site production facility were brought online in the Sarsang block. 2016 activity is focused on bringing additional wells online to utilize existing facility capacity, while further expansion will be evaluated in light of the current macro environment.

Across the portfolio, we continue to focus on cost management and delivering high operational availability in an effort to defend margins within the challenging commodity price environment.

With that brief summary, I'll pass it back to Lee.

Lee M. Tillman - President, Chief Executive Officer & Director

All right, thank you, Mitch.

Capital discipline and balance sheet protection have driven the decisions supporting our reduced 2016 capital program, and slide seven provides our production guidance. As I mentioned earlier, we're forecasting total company production in 2016 to decline 6% to 8% from 2015, adjusted for our divestitures in the Gulf of Mexico and East Texas/North Louisiana.

For the first quarter of 2016, our total E&P guidance includes two extraordinary downtime events. First, we expect downtime in EG of approximately 20,000 net BOE per day associated with the installation of the jacket and topsides for the Alba Compression project, as well as planned maintenance. Installation was completed in January, and the Alba field and onshore plants returned to full production earlier this month.

Second, in late December the Brae Alpha installation experienced a process pipe failure and first quarter total E&P production guidance includes the impact of approximately 7,000 net BOE per day of UK production that remains shut in while repairs are underway. Resumption of full production is expected in the second quarter.

Wrapping up on slide eight, we anticipate 2016 will require a similar level of flexibility to adapt to the uncertain macro environment, as did last year. In 2015, we lowered production and G&A expenses over $435 million. We reduced our workforce by over 20%, which will generate about $160 million of annualized net savings. And we decreased our quarterly dividend, increasing annual free cash flow by more than $425 million. We became even more efficient operators in each of our basins, decreasing completed well costs everywhere through a combination of commercial savings and execution efficiencies.

2016 will require that same level of focus and discipline, and our $1.4 billion capital program is designed with balance sheet protection as our top priority. The plan continues to direct the lion's share of capital to our short-cycle resources plays, which provide the most flexibility. The remainder of the portfolio includes completing long-cycle projects that contribute production volumes to the company, as well as keeping committed capital obligations to a minimal level. We will continue lowering our cost structure, enhancing operational productivity, and progressing toward our newly revised non-core asset sales target of $750 million to $1 billion.

Finally, our $4.2 billion in liquidity at year end, which includes $1.2 billion in cash and an undrawn $3 billion revolving credit facility, positions us well for the reality of sustained low commodity prices.

That concludes our remarks, and I will now hand back to Chris.

Christopher C. Phillips - Director-Investor Relations

Thanks, Lee. Before we open the call for questions, we'd like to request that you ask no more than two questions with associated clarifications, and you can re-prompt as time permits.

With that, Katie, we'll open the lines for questions.

Question-and-Answer Session

Operator

Thank you. And our first question comes from Doug Leggate from Bank of America Merrill Lynch. Doug, please go ahead.

Doug Leggate - Bank of America Merrill Lynch

Thanks. Good morning, everyone. Good morning, Lee.

Lee M. Tillman - President, Chief Executive Officer & Director

Good morning, Doug.

Doug Leggate - Bank of America Merrill Lynch

Lee, I'm afraid the topic du jour is obviously balance sheet strength, credit metrics, and obviously the credit agencies' somewhat onerous price assumptions, one could argue. What additional steps are you prepared to take to basically get market comfort that your balance sheet can be managed through this downturn, and are you prepared to allow your credit rating to slide to sub-investment-grade? And I've got a follow-up.

Lee M. Tillman - President, Chief Executive Officer & Director

Okay, let me take the first part and then maybe let J.R. jump in a little bit on just our view from a credit metric standpoint and the ratings agencies. But our plan, Doug, as we stated in our opening remarks, was really designed with a view of a high $30 WTI and assumed success in our non-core asset sales targets. But we still have implicit quite a bit of flexibility within our capital program to really adjust further as we see changes in price, changes in the macro, as well as we see the outcome from our non-core asset sales.

I think we demonstrated last year certainly our willingness to use every lever available to us to ensure that we do in fact protect the balance sheet. I ticked through a few of those in my opening remarks. But the adjustment to the dividend, I think even the reduction in our capital budget last year of about $500 million, the strong steps that we took early in the cycle on both production expenses and G&A cost, including basically a 700-person reduction in our workforce, all of these are I think are demonstrative of the actions that we are prepared to take to ensure that we are putting balance sheet protection first and foremost. Maybe with respect to the credit agencies and the credit metrics, perhaps I'll just let J.R. chime in on those.

John R. Sult - Executive Vice President and Chief Financial Officer

Doug, as you had indicated, clearly we have had actions already taken by two of the three rating agencies to date. At those two that have taken action, we remain investment-grade. Clearly, there is one still remaining outstanding. You're right in that they have taken an arguably significantly different view with regard to the commodity price outlook and seem to be fundamentally approaching the industry different than historically. And candidly, the outcome is uncertain.

But what I would tell you, as Lee had indicated, we're going to continue to make the decisions that are in the best interest of all stakeholders to support the balance sheet and the outcome – with regard to the agencies will be the outcome. But we're going to continue to make sure that we've got sufficient liquidity and appropriate balance sheet so that we can continue to be successful in terms of developing the resources that we have at this company.

Lee M. Tillman - President, Chief Executive Officer & Director

Doug, you said you had a second question

Doug Leggate - Bank of America Merrill Lynch

Yes. Just maybe, if you don't mind, I'll just do a clarification on the first one as my second question, if that's okay. I'll be more direct about it. Obviously, we've seen some of your peers issue equity. Is that a risk for Marathon, in your view? Is it something you think would be the right move given where your stock is trading, or can you rule it out for investors at this point? And I'll leave it there. Thanks.

Lee M. Tillman - President, Chief Executive Officer & Director

Doug, I think, as we have said, there's no doubt in the current environment that the balance sheet is our top priority. We have to maintain as much financial and operational flexibility as we can to adjust to these very dynamic market conditions. We're constantly reassessing in real time our capital budget, our non-core asset sales, our overall balance sheet strength, as well as our liquidity. And I think although our business plan assumes the successful execution of our non-core assets program to really contribute to our goal of free cash flow neutrality, we have to continue to keep all options on the table and available to us that give us that financial flexibility going forward. So again, you should expect us to continue to consider and access all of the levers available to us going forward.

Doug Leggate - Bank of America Merrill Lynch

I appreciate you answering that, Lee. Thanks very much.

Lee M. Tillman - President, Chief Executive Officer & Director

Thank you, Doug.

Operator

And our next question comes from Edward Westlake from Credit Suisse. Edward, please go ahead.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

Yeah, good morning, Lee, good morning, J.R.

Lee M. Tillman - President, Chief Executive Officer & Director

Morning, Ed.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

Just on – and Mitch and Lance. Just on the divestiture program, maybe just give us some idea as to why you think you could be confident to hit that $750 million to $1 billion total program.

Lee M. Tillman - President, Chief Executive Officer & Director

Yeah, absolutely, Ed. Good morning. From the first maybe I'll just acknowledge that the market no doubt has softened since we've embarked on our non-core asset program. There's no question that the sales market is much more challenging than it was even last year. But I'll go back and say as a reminder, when we initially set our non-core asset target last year, we stated that we had identified a pretty broad pool of non-core assets that were well in excess of that original $500 million. And what I'll say is based on our progress to date, the transactions that we've been able to complete, and the quality as well as the diversity of the identified non-core assets that we still have in the hopper, we're comfortable increasing that target to that $750 million to $1 billion.

The way I would describe the assets, Ed, is that they're primarily U.S. upstream and midstream. They're both operated and non-operated. But the list is very diverse, and we're very satisfied taking some singles and doubles. Some will be bigger, but there's quite a few that will be smaller. And thus far the market has shown an ability to digest some of those smaller transactions quite readily. Timing for us, we would expect to progress toward our revised target really through the balance of 2016.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

And then a follow-up would be around 2017 getting a little depressing about recession risks. They are clearly rising. We'll see if one actually occurs, but you'll end up with, say, $1.2 billion or maybe whatever the number is at the end of the year depending on the asset sales program and the reduction in capital. But again, if you were looking into 2017, it would still feel if there was a recession that you'd need to do some shoring up of the balance sheet for that year. So what would be next in terms of the order if we had two years of low prices?

Lee M. Tillman - President, Chief Executive Officer & Director

Of course, we're trying to, of course, manage through 2016 now. But as we have looked ahead to 2017, there's no question, Ed, that the majority of our capital will still be directed to the short-cycle investments. And as such, that still gives us a great deal of flexibility within our capital program and our capital spend. That activity, though, is going to largely depend upon where commodity prices are.

And just to maybe level-set a little bit, at the current contango in the strip, that would equate to us to about $500 million of incremental free cash flow in 2017. And then at that point, as incremental cash flow might be realized, it would be a capital allocation decision based on the highest and best use as to whether that goes to balance sheet strengthening and/or into organic investment. I don't see those two as necessarily being mutually exclusive.

The other thing that I would add too is that although we do have some long-cycle projects that Mitch addressed rolling off in 2016, we do have a little bit of an offset in that we do have a remaining deepwater GoM commitment – recommitment that will come back to us in 2017. But largely, those two somewhat balance off of one another.

Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker)

Thank you.

Lee M. Tillman - President, Chief Executive Officer & Director

Thanks, Ed.

Operator

And our next question comes from Evan Calio from Morgan Stanley. Evan, please go ahead.

Evan Calio - Morgan Stanley & Co. LLC

Hey, good morning, guys.

Lee M. Tillman - President, Chief Executive Officer & Director

Hey, Evan.

Evan Calio - Morgan Stanley & Co. LLC

Just to follow-up on credit and balance sheet, the du jour topic, and I understand you're protecting the balance sheet in the moves today. But how committed are you to an investment-grade rating? And based upon those private conversations, do you expect to be able to maintain it from – I know you talked about Moody's, but from the other two agencies? And then I have a follow-up.

John R. Sult - Executive Vice President and Chief Financial Officer

Evan, we have maintained it at the other two rating agencies. They just recently published earlier this month. And so those have come out with investment-grade ratings. We're a notch lower than where they were, but we have maintained it there.

As for the outstanding rating evaluation, honestly, Evan, I don't know what they're going to define as what it means to be an investment-grade anymore. I remember what it used to be throughout most of my career. And based on my historical understanding, I would say we still meet the metrics that they used to lay out there, but honestly, those are changing.

And so I just – I don't want to predict what they will ultimately do. But at the end of the day, I'm still investment-grade. I'm still going to be part of the IG indices from a bond rating standpoint. There really isn't any significant impact on us if that one rating agency were to not rate us investment-grade. Clearly, there's going to be a cost issue and in periods that are highly volatile an access issue, but all of that is completely manageable.

Evan Calio - Morgan Stanley & Co. LLC

And then how do you weigh that? How do you weigh the impact of an even deeper CapEx cut or a dilutive equity raise against a loss of that status? It just seems to be a primary debate amongst many of your peers.

John R. Sult - Executive Vice President and Chief Financial Officer

Again, I don't think that ultimately you can necessarily solve for just one equation here. I've got to make decisions in the best interest of all of the stakeholders, and we're going to continue to do that. But as I said before, the way we've got the capital structure set up, the depth of our liquidity that exists that I'm very comfortable that whether we ultimately have an investment-grade rating from the remaining agency or not is not going to impact our ability to remain strong in this commodity price cycle.

Evan Calio - Morgan Stanley & Co. LLC

Great.

Lee M. Tillman - President, Chief Executive Officer & Director

Thanks, Evan.

Operator

And our next question comes from Brian Singer from Goldman Sachs. Brian, please go ahead.

Brian Singer - Goldman Sachs & Co.

Thank you, good morning.

Lee M. Tillman - President, Chief Executive Officer & Director

Hey, Brian.

John R. Sult - Executive Vice President and Chief Financial Officer

Good morning, Brian.

Brian Singer - Goldman Sachs & Co.

So just to stay on the usual suspect topic here, I think what we're probably trying to get at here is how do you define success from a balance sheet perspective? What are you trying – where are you trying to take the company here? What is the key metric you're trying to use that is driving your decisions? It sounds like it's not necessarily but hopefully investment-grade. Is it leverage, is it liquidity for a couple years at $30 oil? Can you just talk to how you would define success from a balance sheet perspective?

John R. Sult - Executive Vice President and Chief Financial Officer

Brian, honestly, the way we're thinking about it is really just to focus on managing the balance sheet throughout the full cycle. So historically, I've always tried to focus on liquidity when you're at the bottom of the cycle. And again, historically, that was the way it was measured, is whether or not you had enough liquidity to get you through the bottom of the cycle.

As Lee indicated in his remarks, our goal here in 2016 is free cash flow neutrality, so to be able to manage the outspend with the success and the non-core assets sale program and not add debt to the balance sheet. As I indicated, we're going to maintain ample liquidity to support the business. And in addition, I want to make sure in not only liquidity but the cash component of that liquidity to maintain the option associated with just delevering the balance sheet in late 2017 when we have a relatively modest amount of debt that becomes due, about $700 million. So clearly, I think we've said multiple times, the non-core asset sale program and the flexibility of the capital program are really going to be the key levers in that.

But one thing I do want to go to on this issue of leverage metrics and really highlight what Lee said before, just the embedded oil price leverage and the impact to cash flows and candidly leverage metrics is significant. And Lee just said, just assuming the forward contango that exists today, so whatever that is from an accrual (33:03) standpoint, it's probably about $7. Sometime around there is about $500 million of free cash flow and a significant step change in what your leverage would be on a net debt to EBITDA standpoint. So to me, we're focused on managing through the cycle. And again, as I indicated to Evan, really just trying to make decisions that are in the best interest of the business.

Brian Singer - Goldman Sachs & Co.

That's great. My follow-up is perhaps a surprise operational resource question. You've acquired some additional acreage in SCOOP and STACK here over the last year, and I wondered if you could tell us a little bit more, A), what that does to make your position more contiguous, and then how you would think about and at what price you would allocate more capital and where you would go first within your key onshore shale plays?

Lance W. Robertson - Vice President-North America Production Operations

Sure, Brian. This is Lance. I think you should think about those acres as that we're constantly looking, particularly in Oklahoma, which is an early cycle in the play relative to the others, to both, as you described, core up that position and just secure additional resources.

We were very successful over the last year, primarily organically, through small local auction processes in the BIA [U.S. Bureau of Indian Affairs] and the CLO [Oklahoma Commissioners of the Land Office], and other organizations, as well as just doing small leasing opportunities with peers and accumulated 14,000 acres in Oklahoma. The overwhelming majority of that is in the STACK play, focused in the core, primarily Blaine County. What we found over the balance of that year is that the core of the Meramec has shifted in a western direction, which is where most of that acreage was acquired. And we managed to secure all that for about $3,000 an acre, which is very competitive.

Referencing where we would go in terms of activity and allocate that capital, I think we're always going to take that broadly within our overall capital allocation process. We certainly want to be able to continue to delineate Oklahoma because we have more to learn there perhaps than other basins. I think we're going to have to wait to see how the commodity market really evolves before we can make those capital allocations beyond 2016.

Brian Singer - Goldman Sachs & Co.

Thank you.

Operator

And our next question comes from Harry Mateer from Barclays. Harry, please go ahead.

Harry Mateer - Barclays Capital, Inc.

Hey, good morning, guys. So I guess back to the topic du jour on the balance sheet, but a bit of a different approach. To the extent you raise additional capital from non-core asset sales or other means, how do you think about deploying that? Is it more about maximizing liquidity right now? Or when you look at where your bonds are trading, you've got some bonds, particularly out the curve, trading at a pretty chunky discount to par. So do you think there are some opportunities to maybe reduce debt that way and take advantage of that discount currently in the market?

John R. Sult - Executive Vice President and Chief Financial Officer

Harry, this is J.R. I would approach that the same way Lance was talking about whether we'd allocate capital to Oklahoma to buy acreage. It really is – each one of these investment opportunities are measured against themselves, whether it's drill bit capital, whether it's acquiring additional acres in Oklahoma, or whether it's even considering buying back some debt at a discount. So we're going to measure all those capital allocation decisions and determine which ones make the best sense for the enterprise.

Clearly, you've got to do that. You've got to do that thoughtfully. That's a great example in response to some of the earlier questions where that might be in the best interest of the company. Rating agencies may view that transaction differently in terms of the way an investment-grade company should manage their business with the fundamental premise is that your debt holders be paid off at par. But again, we are going to make those decisions that are in the best interest of all stakeholders, and it would be something that we would consider.

Harry Mateer - Barclays Capital, Inc.

Okay, thanks. And then my follow-up is the 2017 maturity. It's later in 2017, so you've got some time. But as you think about managing the business through the cycle, is your goal to be in a position where we you can pay that down, or is it something more where you would like to be in the position to be able to refinance that?

John R. Sult - Executive Vice President and Chief Financial Officer

As I indicated, you probably missed it, Harry, earlier. I really want to be in the position to have the flexibility and the optionality just to pay that down, pay it off in other words. Clearly, I've got the liquidity to where I could bridge it on my facility. But I really want to be in a position if the market is what it is today, if the forward curve merely slides into 2017, to be able to pay that off.

Harry Mateer - Barclays Capital, Inc.

Got it, thanks very much.

John R. Sult - Executive Vice President and Chief Financial Officer

Thanks, Harry.

Operator

And our next question comes from David Heikkinen from Heikkinen Energy. David, please go ahead.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

Good morning, guys.

John R. Sult - Executive Vice President and Chief Financial Officer

Hey, David, she got your name right.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

I know, it's nice.

John R. Sult - Executive Vice President and Chief Financial Officer

It's historic.

Lee M. Tillman - President, Chief Executive Officer & Director

Hey, David.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

Enough of a stay-it now (38:01). So just thinking about the Eagle Ford program, you've basically been running flat in net wells for the last couple quarters. Can you just talk about the pacing of net wells in 2016 as you drop to five rigs and kind of the – particularly given the shape of the commodity curve? Do you go slower earlier and then pick up, or how do you think through just that space, and then really for the other basins as well?

Lance W. Robertson - Vice President-North America Production Operations

Sure, David. This is Lance. I think perhaps we've articulated in the capital deck and the remarks this morning that we're prepared, that we're already moving into the activity reductions in Eagle Ford. We actually released our first rig recently this month. Down at the end of this quarter we'll be down to five rigs, and then we're going to stay at that flat activity level moving forward. I think there's a desire as we looked at the balance sheet prioritization overall. We want to take those decisions early in the year, and we have. And so you'll see us go down to that level and then maintain that activity level moving forward.

From quarter to quarter, you'll see those net wells to sales moderate up or down a little bit, as we have diverse working interest across it, but it will be relatively level from that point forward. Similarly, we're going to continue to run effectively the two rigs we had all in 2015 through Oklahoma to manage lease obligations and continue to delineate and learn in the Springer the things we need to. And then to reiterate I think what I mentioned earlier is that we've actually released our Bakken activity, challenged by returns currently at that price. And so we're going to have limited activity for the rest of the year in the Bakken.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

So first quarter will have more wells, and then just divide the rest of the wells through the remainder of the year pretty evenly in the Eagle Ford and just keep things flat? There's no staging or duck games going on is I guess what I'm getting at.

Lance W. Robertson - Vice President-North America Production Operations

No, I think that's a great clarification, David, in that we've said all along that we're not really building a drilled but uncompleted inventory. We're going to continue to manage our inventory of wells to efficiently manage our completion operations without really materially building or depleting that inventory.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

That's helpful. And then I know you don't want to get into details of volumes on the assets that you're selling, but the numbers are getting big with $1 billion. Can you just goal-post us on U.S. upstream and midstream, a split of how much would be midstream, how much could be upstream, and an idea of rough volumes? Anything could be helpful.

Lee M. Tillman - President, Chief Executive Officer & Director

Yeah, David, this is Lee. As I stated and so you noted that this is primarily U.S. assets that are both upstream and downstream. But if you look at the characteristics of what we've already moved out of the portfolio, you can get a sense for just the diversity and even some of the scale of some of those actions that might occur going forward. For instance, the East Texas/North Louisiana deal was on the order of 4,000 oil equivalent barrels per day. The GoM assets were on the order of about 10,000-ish barrels a day.

So those are the ballparks now. Those are some of the small to mid-sized assets we might talk about now. There could be some larger, more material assets that do ultimately come into play. And of course, the midstream assets, the advantage there is that there really is no volumetric impact per se, but you have to, of course, be absolutely concerned about making sure that you have the right operational transition there to ensure security of your barrels. So I don't know, but hopefully that helped a little bit.

David Martin Heikkinen - Heikkinen Energy Advisors LLC

And scale, that's helpful. Thanks, guys.

Lee M. Tillman - President, Chief Executive Officer & Director

Thank you.

Operator

And our next question comes from Roger Read from Wells Fargo. Roger, please go ahead.

Roger D. Read - Wells Fargo Securities LLC

Thank you. Good morning.

John R. Sult - Executive Vice President and Chief Financial Officer

Hi, Roger.

Roger D. Read - Wells Fargo Securities LLC

I guess maybe to follow up a little bit with Dave's question there on the potential sales that we should think about for volumes, is it just that wide open based on price, or do you at least have sort of a maybe high-to-low range of full-year potential impact of what's potentially being marketed out there, you have a data room open, that sort of thing?

Lee M. Tillman - President, Chief Executive Officer & Director

Without getting too much into the specifics, Roger, we certainly have a good idea of the pool of assets that we're prepared to put into the market. The uncertainty is just which of those assets may in fact be transactable. And each of those has a finite, I would say, probability of occurrence, and it really comes down to connecting the assets to the correct buyers. And because of the diversity of these assets, they do appeal to a very, I would say, broad and diverse range of buyers potentially as well. So that's one of the reasons why we bracketed the range the way that we did is a little bit of the reflection of some of that uncertainty. And it's uncertainty not only just in which transactions will move forward, but also just the ultimate valuations that we're able to secure in those transactions as well.

Roger D. Read - Wells Fargo Securities LLC

Sure. I guess it just sounds like, from a buyer's perspective, they're more interested in buying assets that generate cash flow. So just trying to get a feel for...

Lee M. Tillman - President, Chief Executive Officer & Director

Absolutely.

Roger D. Read - Wells Fargo Securities LLC

...where the volumes might go along now.

John R. Sult - Executive Vice President and Chief Financial Officer

Hey, Roger, this J.R. I think that the question is fair. I think what Lee is trying to convey is we've got a lot of optionality here. And we're still talking about a range, even the revised range that candidly is not reflective yet of the full potential of what we're looking at. And so we've got the ability to plug-and-play assets here. And because there's a midstream element to this, it's hard for us to be able to say exactly whether this asset ultimately goes or that asset goes. So we still are very confident and comfortable of that $750 million to $1 billion, but candidly it's going to be very asset-specific in terms of which ones we use to achieve that objective.

Roger D. Read - Wells Fargo Securities LLC

Okay, that's helpful. Thanks, and then probably more of a question for Lance. But, decline rates in the Eagle Ford with such a ramp down of drilling and well completions relative to the pace we were on, and I understand – I recognize you would have studied it quite a bit as you lay out the 6% to 8% decline for the year. But can you give us an idea of some of the confidence you have as some of the wells get older and fewer new wells coming in to lay out the overall view here on the production side for 2016?

Lance W. Robertson - Vice President-North America Production Operations

Sure, Roger. And as you describe, we've looked at a number of scenarios across the resource plays for activity in that, and they all have their own implicit declines depending on the new wells coming to sales. I think individually in each of the basins, we have a lot of confidence and understanding of the decline profiles of the areas. And so it just becomes a matter of what's the capital we're going to allocate to it, and then the production is the outcome from it in this case. I think it's pretty clear that we've taken the activity down both in 2015 and 2016. There have to be decline in there. I think importantly, in the Eagle Ford for example, from Q3 to Q4 we held flat with effectively flat wells to sales, which indicates all the horizons we've been developing there are producing well and meeting our expectations. And then I think you should think of the resource plays from annual 2015 to annual 2016 are going to have an overall decline in the low teens.

Roger D. Read - Wells Fargo Securities LLC

Okay, that's helpful. Thank you.

Operator

And our next question comes from John Herrlin from Société Générale. John, please go ahead.

John P. Herrlin - SG Americas Securities LLC

Yeah, hi. Thank you. Regarding the Springer well, were you surprised at that degree of liquids cut?

Lance W. Robertson - Vice President-North America Production Operations

John, so I think the Springer is pretty early in the SCOOP area, and what we find there are two different distinct areas where it's been tested today, a northern core and a southern core. The Newby well we drilled and brought online last quarter was in that southern core area where there's probably the most data. We expected that to be oil biased in that area. I think we had a lot of confidence going in. The results so far have borne that out. The performance from that well has been very strong to begin with, and it actually is similar to the underlying Woodford, elevated reservoir pressure. The cumulative 30-day/60-day production tend to be relatively flat. That same production behavior has been borne out in the Springer thus far. So it's actually very consistent with our expectations. It's why we're excited about it.

What we also see is the opportunity to delineate this play downdip from the core oil area that we've explored and others have looked at to date and to a rich condensate window perhaps. So you'll see us continue to test that in a limited way, the Springer, across 2016.

John P. Herrlin - SG Americas Securities LLC

Great, next one from me. J.R., you mentioned liquidity and not being like the past. If you look at your overall liquidity relative to your market value, in the past when commodity prices were down, you would have a much lower percentage of overall liquidity relative to market cap, but it seems like a lot of companies are getting penalized today, or a straight question perhaps on strategy or leverage or whatever. Do you ever recall a time when there was this much relative liquidity to market cap, equity cap?

John R. Sult - Executive Vice President and Chief Financial Officer

That's a great point, John. Honestly, there has been a shift, and it happened maybe even toward the latter part of last year to where I think there was a point in which liquidity was being rewarded in terms of equity valuations, but then it quickly shifted to almost a singular focus on leverage without regard to liquidity. And so I don't recall that, and you've got a long history as well, John, in terms of that being the market behavior historically.

Candidly, I'm very thankful for the early moves that we did with regard to shoring up that liquidity, the early moves we did with regard to extending debt maturities, and feel like we're well situated for both 2016 and 2017 on the liquidity front. But it is interesting that the anomalies that we're seeing or the nuances as compared to previous market corrections.

John P. Herrlin - SG Americas Securities LLC

Thank you.

John R. Sult - Executive Vice President and Chief Financial Officer

Thanks, John.

Operator

And our next question comes from Pavel Molchanov from Raymond James. Pavel, please go ahead.

Pavel S. Molchanov - Raymond James & Associates, Inc.

Thanks, guys, just one from me. You mentioned that the current year CapEx is predicated on high $30s average. If per chance we were to see a recovery, let's say into the $50s towards the middle of the year, would you be inclined to upsize your activity level in the second half? And in particular, would you return to drilling in the Bakken?

Lee M. Tillman - President, Chief Executive Officer & Director

I think as we saw that kind of recovery and we're convinced of the stability of it, I think it goes back to a point that J.R. made earlier. It's going to be a capital allocation decision around do we feel that there is still balance sheet repair that needs to be done at that stage. And that would not be mutually exclusive to putting capital back to work into the short cycle investments in the resource plays.

When we think about capital allocation organically, certainly our ability to maintain the scale efficiencies in the Eagle Ford and the strong economics there would make it a viable candidate for that incremental capital. But strategically, because of its role in our future growth, driving more capital as well into Oklahoma would be one of our preferred pathways also. From an execution capacity and a competency standpoint, we feel that we're more than prepared to take that step in the event that that incremental cash flow comes available for investment.

John R. Sult - Executive Vice President and Chief Financial Officer

But, Pavel, I think you raised a great point and that is because you've picked $50 as your hypothetical example, the Bakken at $50 is dramatically different than the Bakken today. And the leverage to crude oil changes dramatically. So even beginning at that level, all of a sudden the capital allocation decisions for us with whatever limited additional capital we chose to go to a drill bit versus the balance sheet becomes much tougher at that point in time and a high class problem to deal with. But you're exactly right to highlight that leverage to commodity prices in the Bakken.

Lee M. Tillman - President, Chief Executive Officer & Director

And I would also add as well that some of the success that Lance and his team have had in West Myrmidon near the Nesson Anticline has been pretty dramatic. And I think as we saw a recovery in pricing, I believe those opportunities would certainly come back into play.

Pavel S. Molchanov - Raymond James & Associates, Inc.

I appreciate it.

John R. Sult - Executive Vice President and Chief Financial Officer

Thanks, Pavel.

Operator

And our next question comes from Paul Sankey from Wolfe Research. Paul, please go ahead.

Paul Sankey - Wolfe Research LLC

Hi, everyone. Good morning.

John R. Sult - Executive Vice President and Chief Financial Officer

Hi, Paul.

Lee M. Tillman - President, Chief Executive Officer & Director

Hi, Paul. Good morning.

Paul Sankey - Wolfe Research LLC

I understand that these are tough times and you're very much circling the wagons. But could you just outline the bull case, the equity bull case for Marathon in competitive terms and maybe suggest to me how I should pitch the stock? Thanks.

Lee M. Tillman - President, Chief Executive Officer & Director

Sure. Absolutely, Paul. I think when you consider more constructive pricing, our leveraging up to crude oil, which has of course been a bit painful on the way down, that's going to feel a bit different as we start seeing that more constructive pricing. And then I think it's the strength of our organic inventory across the three core basins, which now account for 3.6 billion BOE of 2P resource.

That's really the investment case, not only the scale, the economies of scale that we have and developed a mode in the Eagle Ford, but certainly the potential for growth both midterm and long term in Oklahoma as well as a very solid oil position in Bakken, and I think a proven execution model where we have been able to not only drive capital efficiencies but also operating efficiencies, and all of that being supported I think by still some very good conventional assets as well, including Equatorial Guinea, which we just chatted about the project there, the Compression project.

Paul Sankey - Wolfe Research LLC

That's good. But I guess primarily you're saying that you' are dependent on pricing. But you'd highlight a better organic inventory was the second point?

Lee M. Tillman - President, Chief Executive Officer & Director

Yes, I would say that I would say it's a strong high-quality inventory, very resilient, very oil-weighted. It's also one that we think is in three of the highest-quality plays here in the U.S., and all of those also at scale.

Paul Sankey - Wolfe Research LLC

Lee, just changing – thank you. I appreciate the answer. Is there any potential for mergers or acquisitions as an alternate way to change the investment case? Thanks.

Lee M. Tillman - President, Chief Executive Officer & Director

Certainly that question is always out there. I think in the current environment, you haven't seen even a lot of small even asset level activity, I think largely speaking because of the volatility and the dislocation between the bid/ask spread has just really not facilitated that. Certainly where the market sits today, consolidation and the synergies that can be generated from that are very material relative to market caps as they stand today. So that case even beyond say, let's say, an improvement of overall portfolio and possibly even balance sheet upside, I think there is probably a case out there for some pair-ups that might be based on the synergy benefits alone.

Paul Sankey - Wolfe Research LLC

Thanks, Lee.

Lee M. Tillman - President, Chief Executive Officer & Director

Thank you.

Operator

And our last question comes from Arun Jayaram from JPMorgan. Arun, please go ahead.

Arun Jayaram - JPMorgan Securities LLC

Good morning. I was wondering if you could help us think about the shape of the U.S. production profile. You guys talked about a 6% to 8% decline on an adjusted basis. I think you're spending about $1 billion on the U.S. unconventionals. So I was just wondering if you could maybe help us think about how the Q4-to-Q4 exit rate in the U.S. could look like at that level-setting.

Lee M. Tillman - President, Chief Executive Officer & Director

You accurately depicted it. I think when you think about the profile coming into the year, we've got an average-to-average that's got a midpoint of that 6% to 8% of about a 7% decline. When you think of total company exit-to-exit, you should probably think of it being towards the upper end of that decline range, if that helps calibrate. So there is in fact a profile to the year as you do experience decline through the year as you head toward that exit rate.

Arun Jayaram - JPMorgan Securities LLC

And then just – I guess I was about – just to clarify, is it more focused on maybe the U.S. versus international producing assets?

Lee M. Tillman - President, Chief Executive Officer & Director

I think as Lance alluded to, our resource play annual average declines year-on-year 2015 to 2016 are in the low teens.

Arun Jayaram - JPMorgan Securities LLC

Yes.

Lee M. Tillman - President, Chief Executive Officer & Director

You would expect the exit-to-exit for the U.S. resource plays to probably be in the mid-teens.

Arun Jayaram - JPMorgan Securities LLC

Mid-teens, okay, that's helpful, and just final question here regarding the asset sales process. Under our model we peg about $500 million to $600 million of outspend in 2016 at the strip. You obviously have the asset sales underway. Let's just say that you partially cover that outspend with asset sales. What would be other additional leverage you think of pulling? Would it be to reduce CapEx, or would you consider equity in that circumstance?

Lee M. Tillman - President, Chief Executive Officer & Director

I think for that level of outspend, which to me is getting in a much more manageable zip code, I think we'd look again at those core levers that we can control. And they would be the capital program, continued I would say capital efficiency as well as operating efficiency. Those would be the levers I think we would go to for that level of outspend, and not to mention the fact again that we do have, again, ample liquidity to support that.

Arun Jayaram - JPMorgan Securities LLC

Okay, that's helpful. Thank you so much.

Lee M. Tillman - President, Chief Executive Officer & Director

Thank you.

John R. Sult - Executive Vice President and Chief Financial Officer

Thanks, Arun.

Operator

Thank you. This concludes the question-and-answer session. At this time, I will turn the call back to Mr. Phillips for closing remarks.

Christopher C. Phillips - Director-Investor Relations

I'd like to thank everyone again for their participation this morning. Please contact Zach Dailey or myself if you have any follow-up questions. Katie, thank you. This concludes today's conference call, and you may now disconnect.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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